N.

GREGORY MANKIW
PRINCIPLES OF

ECONOMICS
MACROECONOMICS
Eight Edition
Sixth Edition

CHAPTER Measuring the

2 Cost of Living
(cont) Premium PowerPoint Slides by:
V. Andreea CHIRITESCU
Eastern Illinois University
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management system for classroom use.
 Look for the answers to these questions:
• What is the Consumer Price Index (CPI)?
How is it calculated? What’s it used for?
• What are the problems with the CPI? How serious
are they?
• How does the CPI differ from the GDP deflator?
• How can we use the CPI to compare dollar
amounts from different years? Why would we
want to do this, anyway?
• How can we correct interest rates for inflation?

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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 2
management system for classroom use.
 Outline
• Definition and calculation of CPI
• Problem with the CPI
• Correcting variable for inflation

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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 3
management system for classroom use.
 Look for the answers to these questions:
• What is the Consumer Price Index (CPI)?
How is it calculated? What’s it used for?
• What are the problems with the CPI? How serious
are they?
• How does the CPI differ from the GDP deflator?
• How can we use the CPI to compare dollar
amounts from different years? Why would we
want to do this, anyway?
• How can we correct interest rates for inflation?

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 4
management system for classroom use.
 The Consumer Price Index
• Consumer price index (CPI) (Chỉ số giá tiêu dùng)
– Measure of the overall level of prices/ Thước đo của
mức giá tổng quát/ chung
– Measure of the overall cost of goods and services
bought by a typical consumer/ Thước đo của chi phí
tổng quát/ chung của các hàng hoá và dịch vụ được
mua bởi một người tiêu dùng điển hình
– Computed and reported every month by the Bureau of
Labor Statistics (US)
• VN?

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 Calculating CPI
1. Fix the basket/ Cố định rổ hàng hoá
– Xác định một rổ hàng hoá và dịch vụ được mua bởi
người tiêu dùng điển hình
– Xác định trọng số của hàng hoá và dịch vụ trong rổ
2. Find the prices/ Xác định giá cả
– Thu thập dữ liệu về giá các hang hoá và dịch vụ trong
rổ hàng đã chọ
3. Compute the basket’s cost/ Tính toán chi
phí của rổ hàng
– Tính giá của rổ hàng theo trọng số và giá của từng loại
hàng hoá và dịch vụ
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 Calculating CPI
4. Chose a base year and compute the CPI/ Chọn 1
năm gốc và tính toán CPI
Giá rổ hàng năm nay so với giá rổ hàng năm gốc
Cost of basket this year
CPI this year = x100
Cost of bastket base year

4. Compute the inflation rate/ Tính toán tỷ lệ lạm phát

– Thay đổi % của CPI so với năm trước đó

CPI this year−CPI last year

Inflation rate = ×100
CPI last year
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 EXAMPLE: basket: {4 pizzas, 10 lattes}
price of price of
year cost of basket
pizza latte
2014 $10 $2.00 $10 x 4 + $2 x 10 = $60
2015 $11 $2.50 $11 x 4 + $2.5 x 10 = $69
2016 $12 $3.00 $12 x 4 + $3 x 10 = $78
Compute CPI in each year
(2014 base year) Inflation rate:
2014: 100 x ($60/$60) = 100 15% =
115 – 100
x 100%
100
2015: 100 x ($69/$60) = 115 130 – 115
13% = x 100%
2016: 100 x ($78/$60) = 130 115
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8
 Active Learning 1 Calculating the CPI
CPI basket: price price of
{10 lbs beef, of beef chicken
20 lbs chicken} 2014 $4 $4
The CPI basket 2015 $5 $5
cost $120 in 2014, 2016 $9 $6
the base year.
A. Compute the CPI in 2015.

B. What was the CPI inflation rate from 2015–

2016?
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 Active Learning 2 Substitution bias
CPI basket: cost of CPI
{10 lbs beef, beef chicken
basket
20 lbs chicken} 2014 $4 $4 $120
In 2014 and 2015, 2015 $5 $5 $150
households
2016 $9 $6 $210
bought CPI basket.
In 2016, households bought {5 lbs beef, 25 lbs
chicken}.
A. Compute cost of the 2016 household basket.
B. Compute % increase in cost of household basket
over 2015–2016, compare to CPI inflation rate.
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 Example: Basket with weight

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 What’s in the US CPI’s Basket?

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 What’s in the VN CPI’s Basket?

3.30% Hàng ăn và dịch vụ ăn

4.29% uống
5.99% Đồ uống và thuốc lá¸

May mặc, mũ nón, giầy

2.89%
dép
Nhà ở, điện, nước, chất đốt
36.12%
và VLXD
9.37% Thiết bị và đồ dùng gia
đình
Thuốc và dịch vụ y tế

Giao thông
5.04%
Bưu chính viễn thông

Giáo dục
7.31%
Văn hoá, giải trí và du lịch
3.59%
Hàng hoá và dịch vụ khác
6.37%
15.73%
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 13
management system for classroom use.
 Look for the answers to these questions:
• What is the Consumer Price Index (CPI)?
How is it calculated? What’s it used for?
• What are the problems with the CPI? How serious
are they?
• How does the CPI differ from the GDP deflator?
• How can we use the CPI to compare dollar
amounts from different years? Why would we
want to do this, anyway?
• How can we correct interest rates for inflation?

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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 14
management system for classroom use.
 Problems with the CPI
• Substitution Bias (Thiên vi thay thế)
– Over time, some prices rise faster than others
– Consumers substitute toward goods that become
relatively cheaper, mitigating the effects of price
increases.
– The CPI misses this substitution because it uses a fixed
basket of goods.
CPI được tính toán dựa trên giả định một giỏ hàng hóa cố
định, nó không tính đến khả năng là người tiêu dùng có
khuynh hướng thay thế bằng những hàng hóa có giá tương
đối ngày càng rẻ hơn

– Thus, the CPI overstates increases in the cost of living.

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 Problems with the CPI
• Introduction of New Goods (Sự xuất hiện của hàng
hoá mới)
– The introduction of new goods increases variety, allows
consumers to find products that more closely meet their
needs.
– In effect, dollars become more valuable.
– The CPI misses this effect because it uses a fixed
basket of goods.
CPI không tính đến sự gia tăng sức mua của đồng tiền do
sự xuất hiện các hàng hóa mới.

– Thus, the CPI overstates increases in the cost of living.

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 Problems with the CPI
• Unmeasured Quality Change/ Sự thay đổi về
lượng mà không thể đo lường được
– Improvements in the quality of goods in the basket
increase the value of each dollar.
– The statistic office tries to account for quality changes
but probably misses some, as quality is hard to
measure.
Sự cải tiến chất lượng hàng hóa trong khi giá cả không đổi
làm gia tăng giá trị của đồng tiền, nhưng rất khó để đo
lường một cách đầy đủ

– Thus, the CPI overstates increases in the cost of living.

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management system for classroom use.
 Look for the answers to these questions:
• What is the Consumer Price Index (CPI)?
How is it calculated? What’s it used for?
• What are the problems with the CPI? How serious
are they?
• How does the CPI differ from the GDP deflator?
• How can we use the CPI to compare dollar
amounts from different years? Why would we
want to do this, anyway?
• How can we correct interest rates for inflation?

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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 18
management system for classroom use.
 Contrasting the
CPI and GDP Deflator
• Imported consumer goods
– Included in CPI
– Excluded from GDP deflator
– Hàng tiêu dùng nhập khẩu được tính đến trong CPI
nhưng không được tính đến trong chỉ số khử lạm phát
GDP
• Capital goods:
– Excluded from CPI
– Included in GDP deflator (if produced domestically)
– Hàng hoá vốn không được tính đến trong CPI nhưng
được tính đến trong chỉ số khử lạm phát GDP

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 Contrasting the
CPI and GDP Deflator
• The basket:
– CPI uses fixed basket/ CPI sử dụng rổ hàng cố
định
– GDP deflator uses basket of currently produced
goods & services/ Chỉ số khử lạm phát GDP sử
dụng rổ hàng hoá và dịch vụ hiện hành
– This matters if different prices are changing by
different amounts.

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 Two Measures of Inflation, 1965–2016

GDP deflator
CPI
Percent change per year

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 Active Learning 3 CPI vs. GDP deflator
In each scenario, determine the effects on the
CPI and the GDP deflator.
A. Starbucks raises the price of Frappuccinos.
B. Caterpillar raises the price of the industrial
tractors it manufactures at its Illinois factory.
C. Armani raises the price of the Italian jeans it
sells in the U.S.

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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 22
management system for classroom use.
 Look for the answers to these questions:
• What is the Consumer Price Index (CPI)?
How is it calculated? What’s it used for?
• What are the problems with the CPI? How serious
are they?
• How does the CPI differ from the GDP deflator?
• How can we use the CPI to compare dollar
amounts from different years? Why would we
want to do this, anyway?
• How can we correct interest rates for inflation?

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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 23
management system for classroom use.
 Correcting Variables for Inflation
• Comparing dollar figures from different times
– Inflation makes it harder to compare dollar amounts from
different times/ Lạm phát làm cho việc so sánh số tiền ở
các thời điểm khác nhau khó khăn hơn
• Example: the minimum wage/ Lương tối thiểu
• $1.25 in Dec 1963
• $7.25 in Dec 2013
• Did min wage have more purchasing power in Dec 1963 or Dec
2013?/ Phải chăng lương tối thiểu vào năm 1963 có sức mua
lớn hơn lương tối thiểu năm 2013?
– To compare, use CPI to convert 1963 figure into “2013
dollars”…./ Để so sánh, phải dùng CPI để chuyển số
tiền năm 1963 về năm 2013

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management system for classroom use.
 Correcting Variables for Inflation
• Dollar figures from different times
Amount in today′s dollars =
Price level today
= Amount in year T dollars×
Price level in year T
• In our example:
– “year T ” is 1963, “today” is 2013
– Min wage was $1.25 in year T
– CPI = 30.9 in year T, CPI = 234.6 today
– The minimum wage in 1963 was”
$1.25 x 234.6/30.9 = $9.49 in 2013 dollars.

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management system for classroom use.
 Correcting Variables for Inflation
• Comparing dollar figures from different times
– Researchers, business analysts, and policymakers often
use this technique to convert a time series of current-dollar
(nominal) figures into constant-dollar (real) figures.
– They can then see how a variable has changed over time
after correcting for inflation.
– Example: the minimum wage…
Kỹ thuật này được nhà nghiên cứu, nhà phân tích kinh
doanh và nhà điều hành chính sách sử dụng để chuyển
những con số tính bằng tiền theo giá hiện hành (danh nghĩa)
sang con số tính bằng tiền theo một mức giá không đổi
(thực). Bằng cách này có thể thấy được các biến số thay đổi
như thế nào theo thơi gian sau khi đã điều chỉnh lạm phát
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 The U.S. Minimum Wage in Current Dollars
and Today’s Dollars, 1960–2013

2013 dollars

current dollars

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 Active Learning 4 Comparing tuition increases
Tuition and Fees at U.S. Colleges and Universities
1990 2015
Private non-profit 4-year $9,340 $32,405

Public 4-year $1,908 $9,410

Public 2-year $906 $3,435

CPI 130.7 237.7
• Express the 1990 tuition figures in 2015 dollars,
then compute the percentage increase in real terms
for all three types of schools.
• Which type experienced the largest increase in real
tuition costs?
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management system for classroom use.
 Correcting Variables for Inflation
• Indexation (Chỉ số hoá)
– A dollar amount is indexed for inflation if it is automatically
corrected for inflation by law or in a contract/ Sự điều
chỉnh tự động theo luật pháp hay hợp đồng cho một số
tiền trước tác động của lạm phát
• The increase in CPI automatically determines:
– The COLA in many multi-year labor contracts.
– Adjustments in Social Security payments and federal
income tax brackets.
Sự gia tăng trong CPI quyết định mức trợ cấp chi phí sinh
hoạt (COLA) trong các hợp đồng lao động nhiều năm và
mức điều chỉnh trong các khoản an sinh xã hội và thuế thu
nhập
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management system for classroom use.
 Correcting Variables for Inflation
Real vs. Nominal Interest Rates
• The nominal interest rate (Lãi suất danh nghĩa)
– Interest rate not corrected for inflation
– Rate of growth in the dollar value of a deposit or debt
Lãi suất danh nghĩa chưa được điều chỉnh lạm phát, phản ánh tỷ lệ tăng
giá trị của tiền gửi hoặc nợ.
• The real interest rate (lãi suất thực)
– Corrected for inflation
– Rate of growth in the purchasing power of a deposit or debt
Lãi suất thực đã được điều chỉnh lạm phát, phản ánh tỷ lệ tăng của sức
mua tiền gửi hoặc nợ

Real interest rate=(nominal interest rate)–(inflation rate)

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 Real vs. Nominal Interest Rates
Example:
– Deposit $1,000 for one year.
– Nominal interest rate is 9%.
– During that year, inflation is 3.5%.
– Real interest rate
= Nominal interest rate – Inflation
= 9.0% – 3.5% = 5.5%
– The purchasing power of the $1000 deposit
has grown 5.5%.

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 Real and Nominal Interest Rates in the U.S.,
1960–2015
Interest rate (percent per year)

Real
Nominal

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 Summary
• The Consumer Price Index is a measure of the cost
of living. The CPI tracks the cost of the typical
consumer’s “basket” of goods & services.
• The CPI is used to make Cost of Living
Adjustments and to correct economic variables for
the effects of inflation.
• The real interest rate is corrected for inflation
and is computed by subtracting the inflation rate
from the nominal interest rate.

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